Experts On Third World Banana Republics: The U.S. has Become a Third World Banana Republic

George Washington’s Blog
Saturday, March 28, 2009

Who are the leading experts on third world banana republics?

Probably those at the International Monetary Fund with years of experience lending money to corrupt regimes after their excess became so out of hand that they needed emergency assistance.

Today, two top IMF officials said that the U.S. has become a third world banana republic.

First, Simon Johnson, former chief economist of the IMF, says recovery will fail unless we break the financial oligarchy that is blocking essential reform, and calls the U.S. a banana republic. In his essay “The Quiet Coup” (which includes sections like “Becoming a Banana Republic”), Johnson writes:

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse….

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). . . .But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.The government seems helpless, or unwilling, to act against them.

Second, Desmond Lachman - a long-time official with the IMF and former chief strategist for emerging markets at Salomon Smith Barney - agrees, writing in an essay entitled “Welcome to America, the World’s Scariest Emerging Market”:

The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we’ve mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts….

In visits to Asian capitals during the region’s financial crisis in the late 1990s, I often heard Asian reformers such as Singapore’s Lee Kuan Yew or Japan’s Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change. How fortunate, I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae — among the largest campaign contributors to Congress — made me wonder if the differences between the United States and the Asian economies were only a matter of degree….

If we insist on … not facing our real problems, we might soon lose our status as a country to be emulated and join the ranks of those nations we have patronized for so long.

While such statements are generally taboo among officials or bankers in the U.S., even the former Vice President of the Dallas Federal Reserve agrees:

Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.

“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.